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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______________ to ________________
Commission File No. 000-22474
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AMERICAN BUSINESS FINANCIAL SERVICES, INC.
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(Name of registrant as specified in its charter)
Delaware 87-0418807
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
111 Presidential Boulevard, Bala Cynwyd, PA 19004
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(Address of Principal Executive Offices) (Zip Code)
(610) 668-2440
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(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the
Exchange Act:
Common Stock, par value
$.001 per share
---------------
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
amendment to this Form 10-K. [ ] YES [X] NO
1
The aggregate market value of the 3,323,674 shares of common stock,
$.001 par value per share, held by non-affiliates of the Registrant as of
September 15, 2000 was $35.9 million.
The number of shares outstanding of the Registrant's sole class of
common stock as of September 15, 2000 was 3,323,674 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Proxy Statement for 2000 Annual Meeting of Stockholders
2
Part I
Item 1. Business
Forward Looking Statements
Some of the information in this Annual Report on Form 10-K may contain
forward-looking statements. You can identify these statements by words or
phrases such as "will likely result," "may," "are expected to," "will continue
to," "is anticipated," "estimate," "projected," "intends to" or other similar
words. These forward-looking statements regarding our business and prospects are
based upon numerous assumptions about future conditions, which may ultimately
prove to be inaccurate. Actual events and results may materially differ from
anticipated results described in those statements. Forward-looking statements
involve risks and uncertainties described under "Risk Factors" as well as other
portions of this Annual report on Form 10-K, which could cause our actual
results to differ materially from historical earnings and those presently
anticipated. When considering forward-looking statements, you should keep these
risk factors in mind as well as the other cautionary statements in this Form
10-K. You should not place undue reliance on any forward-looking statement.
General
American Business Financial Services, Inc. is a diversified financial
services company operating throughout the United States. We originate loans
through a combination of channels including a national processing center located
at our centralized operating office in Bala Cynwyd, Pennsylvania, and a retail
branch network of offices. Through our principal direct and indirect
subsidiaries, we originate, service and sell:
o loans to businesses secured by real estate and other business
assets, which we refer to in this document as business purpose
loans;
o mortgage loans which are secured by first and second mortgages on
single-family residences and which do not satisfy the eligibility
requirements of Fannie Mae, Freddie Mac or similar buyers which we
refer to in this document as home equity loans; and
o mortgage loans which are secured by first mortgages on one-to
four-unit residential properties, most of which satisfy the
eligibility requirements of Fannie Mae and Freddie Mac, which are
referred to in this document as conventional first mortgage loans.
In addition, we have entered into business arrangements with several
financial institutions. According to these business arrangements, we purchase
home equity loans that meet our underwriting criteria but do not meet the
underwriting guidelines of the selling institution for loans it holds in its
portfolio. The loans are originated by the selling institution and immediately
sold to us. Following our purchase of the loans through this program, we hold
these
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loans as available for sale until they are sold in connection with a
future securitization. We refer to these business arrangements in this document
as the Bank Alliance Program.
Prior to December 31, 1999, we also originated equipment leases.
Effective December 31, 1999, we de-emphasized the leasing origination business
as a result of our strategy of focusing on our most profitable lines of
business. We are continuing to service the remaining leases in our managed
portfolio, which totaled $119.0 million in gross receivables at June 30, 2000.
We may from time to time consider originating or purchasing new leases.
Our loan customers fall primarily in two categories. The first category
of customers includes credit-impaired borrowers who are generally unable to
obtain financing from banks or savings and loan associations. These institutions
have historically provided loans only to individuals with the most favorable
credit characteristics. These borrowers generally have impaired or
unsubstantiated credit histories and/or unverifiable income. The second category
of customers includes borrowers who would qualify for loans from traditional
lending sources but who still prefer to use our products and services. Our
experience has indicated that these borrowers are attracted to our loan products
as a result of our marketing efforts, the personalized service provided by our
staff of highly trained lending officers and our timely response to loan
requests. Historically, both categories of customers have been willing to pay
our origination fees and interest rates even though they are generally higher
than those charged by traditional lending sources. Leases in our managed
portfolio were typically made to small businesses or proprietorships with less
than 100 employees and favorable credit histories.
We were incorporated in Delaware in 1985 and we began operations in
1988, initially offering business purpose loans secured by real estate through
our subsidiary, American Business Credit.
The ongoing securitization of our loans is a central part of our
current business strategy. A securitization is a financing technique often used
by originators of financial assets to raise capital. A securitization involves
the transfer of a pool of financial assets, in our case, loans, to a trust in
exchange for certificates, notes or other securities issued by the trust and
representing an undivided interest in the trust assets. The transfer to the
trust could involve a sale or pledge of the financial assets depending on the
particular transaction. Next, we sell a portion of the certificates, notes or
other securities to investors for cash. Often the originator of the loans
retains servicing rights, which is the right to service the loans for a fee. The
originator may also retain an interest in the cash flows generated by the
securitized loans, which is subordinate to the regular interest sold to
investors. This interest in the cash flows generated by the securitization is
called an interest-only strip. Through June 30, 2000, we had securitized an
aggregate of $2.3 billion of loans and leases, consisting of $305.7 million of
business purpose loans, $1.8 billion of home equity loans, and $161.6 million of
equipment leases. We retain the servicing rights on all securitized loans and
leases. See "Business-- Securitizations."
In addition to securitizations, we fund our operations with
subordinated debt that we offer from our principal operating office located in
Pennsylvania and branch offices located in Florida and Arizona. We offer this
debt without the assistance of an underwriter or dealer. At June 30, 2000, we
had $390.7 million in subordinated debt outstanding. This debt had a weighted
average
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interest rate of 10.7% and a weighted average maturity of 23 months as of June
30, 2000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
We continue to explore a variety of strategic options to broaden our
product offerings and reduce our cost of funds. To achieve these goals, we may
consider various electronic commerce initiatives, the acquisition of other
finance companies or related companies, the purchase of portfolios of loans, the
issuance of secured credit cards, the origination and servicing of loans insured
by the Small Business Administration and the engagement of independent NASD
registered brokers to assist in the sale of the subordinated debt securities. We
cannot assure you that we will engage in any of the activities listed above or
the impact of those activities on our financial condition or results of
operations.
Our principal executive office is located at 103 Springer Building,
3411 Silverside Road, Wilmington, Delaware 19810. The telephone number at that
address is (302) 478-6160. Our principal operating office is located at
Balapointe Office Centre, 111 Presidential Boulevard, Bala Cynwyd, Pennsylvania
19004. The telephone number at the Balapointe Office Centre is (610) 668-2440.
We maintain a site on the World Wide Web at www.abfsonline.com. The information
on our web site is not and should not be considered part of this document.
Subsidiaries
As a holding company, our activities have been limited to:
o holding the shares of our operating subsidiaries, and
o raising capital for use in the subsidiaries' lending operations.
ABFS is the parent holding company of American Business Credit, Inc.
and its primary subsidiaries, HomeAmerican Credit, Inc. (doing business as
Upland Mortgage), Processing Service Center, Inc., American Business Leasing,
Inc., Tiger Relocation Company (formerly ABC Holdings Corporation), and New
Jersey Mortgage and Investment Corp. and its subsidiary, Federal Leasing Corp.
American Business Credit, a Pennsylvania corporation incorporated in
1988 and acquired by us in 1993, originates, services and sells business purpose
loans. HomeAmerican Credit, a Pennsylvania corporation incorporated in 1991,
originates and sells home equity loans. HomeAmerican Credit acquired Upland
Mortgage Corp. in 1996 and since that time has conducted business as "Upland
Mortgage." Upland Mortgage also purchases home equity loans through the Bank
Alliance Program. Processing Service Center processes home equity loan
applications for financial institutions as part of the Bank Alliance Program.
Incorporated in 1994, American Business Leasing commenced operations in 1995 and
currently services equipment leases held in our managed portfolio.
New Jersey Mortgage and Investment Corp., a New Jersey corporation
organized in 1938 and acquired by us in October 1997, is currently engaged in
the origination and sale of home
5
equity loans, as well as conventional first mortgage loans. New Jersey Mortgage
originates loans secured by real estate. These loans are originated through New
Jersey Mortgage's network of six branch sales offices and three satellite
offices. New Jersey Mortgage has been offering mortgage loans since 1939. We
currently sell conventional first mortgage loans originated by American
Household Mortgage, a division of New Jersey Mortgage, in the secondary market
with servicing released. We also securitize home equity loans originated by New
Jersey Mortgage pursuant to our current securitization program.
New Jersey Mortgage's wholly-owned subsidiary, Federal Leasing Corp.,
is a Delaware corporation which was organized in 1974. Federal Leasing Corp.
currently services leases previously originated and sold through securitization.
Tiger Relocation Company, formerly ABC Holdings Corporation, a
Pennsylvania corporation, was incorporated in 1992 to hold properties acquired
through foreclosure.
We also have numerous special purpose subsidiaries that were
incorporated solely to facilitate our securitizations. Some of those companies
are Delaware investment holding companies. None of these corporations engage in
any business activity other than holding the subordinated certificate, if any,
and the interest-only strips created in connection with securitizations
completed. See "-- Securitizations."
Our newly formed subsidiary, Upland Corporation, has filed an
application with the Federal Deposit Insurance Corporation, and the Utah
Department of Financial Institutions, for a Utah Industrial Loan Corporation
charter. If regulatory approval is obtained, the industrial loan charter would
allow us to originate residential mortgage loan products under one centralized
jurisdiction. The industrial loan subsidiary would also provide us with the
ability to offer home equity lines of credit with card access, Small Business
Administration guaranteed business loans, and FDIC-insured certificates of
deposit. No assurance can be given as to whether or during what time period the
necessary regulatory approvals will be obtained or the conditions that would be
imposed in connection with these approvals.
6
The following chart sets forth our basic organizational structure and
our primary subsidiaries(a).
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ABFS
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(Holding Company)
(Issues subordinated debt securities)
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AMERICAN BUSINESS CREDIT, INC.
------------------------------------------------------------------
(Originates and services business purpose loans)
------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
HOMEAMERICAN
CREDIT, INC.
NEW JERSEY d/b/a PROCESSING AMERICAN TIGER
MORTGAGE AND UPLAND SERVICE BUSINESS RELOCATION
INVESTMENT CORP. MORTGAGE CENTER, INC. LEASING, INC. COMPANY
- ------------------------------------------------------------------------------------------------------
(Originates and (Originates, (Processes Bank (Services (Holds foreclosed
services purchases and Alliance equipment real estate)
conventional services home Program leases)
first mortgage equity loans) (b) home equity
and home equity loans)
loans)
- -----------------------
- -----------------------
FEDERAL
LEASING CORP.
- -----------------------
(Services
equipment leases)
- -----------------------
- ---------------------
(a) In addition to the corporation pictured above, we organized at least one
special purpose corporation for each securitization.
(b) Loans purchased by Upland Mortgage represents loans acquired through the
Bank Alliance Program.
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Lending and Leasing Activities
General. The following table sets forth information concerning our loan
and lease origination, purchase and sale activities for the periods indicated.
Year Ended June 30,
---------------------------------------------
2000 1999 1998
--------------- -------------- --------------
(dollars in thousands)
Loans/Leases Originated/Purchased
Business purpose loans.......................... $ 106,187 $ 64,818 $ 52,335
Home equity loans............................... 949,014 634,820 328,089
Conventional first mortgage loans............... 42,607 66,519 33,671
Equipment leases................................ 19,631 96,289 70,480
Number of Loans/Leases
Business purpose loans.......................... 1,198 806 632
Home equity loans............................... 13,544 8,629 5,292
Conventional first mortgage loans............... 267 403 218
Equipment leases................................ 1,020 4,138 3,350
Average Loan/Lease Size
Business purpose loans.......................... $ 89 $ 80 $ 83
Home equity loans............................... 70 74 62
Conventional first mortgage loans............... 160 165 154
Equipment leases................................ 19 23 21
Weighted Average Interest Rate
Business purpose loans.......................... 15.99% 15.91% 15.96%
Home equity loans............................... 11.28% 11.05% 11.95%
Conventional first mortgage loans............... 8.75% 7.67% 8.22%
Equipment leases................................ 11.25% 11.40% 12.19%
Weighted Average Term (in months)
Business purpose loans.......................... 171 169 172
Home equity loans............................... 259 261 244
Conventional first mortgage loans............... 345 322 340
Equipment leases................................ 50 50 49
Loans/Leases Sold
Business purpose loans.......................... $ 104,503 $ 71,931 $ 54,135
Home equity and conventional first
mortgage loans............................... 990,606 613,069 322,459
Equipment leases................................ 9,263 92,597 59,700
Number of Loans/Leases Sold
Business purpose loans.......................... 1,163 911 629
Home equity and conventional first mortgage
loans........................................ 13,190 8,074 4,753
Equipment leases................................ 459 4,363 3,707
Weighted Average Rate on Loans/Leases................. 11.63% 11.30% 11.63%
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The following table sets forth information regarding the average
loan-to-value ratios for loans we originated during the periods indicated.
Years Ending June 30,
----------------------------------
Loan Type 2000 1999 1998
------ ------ ------
Business purpose loans.................................. 60.9% 61.5% 60.5%
Home equity loans....................................... 78.9 78.0 76.6
Conventional first mortgage loans....................... 83.7 78.0 79.9
The following table shows the geographic distribution of our loan and
lease originations and purchases during the periods indicated.
Year Ended June 30,
----------------------------------------------------------------------------
2000 % 1999 % 1998 %
---------- ------ -------- ------ --------- ------
New York............. $300,380 26.88% $163,580 18.97% $ 54,907 11.31%
New Jersey........... 184,123 16.48 236,976 27.48 128,025 26.38
Pennsylvania......... 130,928 11.72 139,992 16.23 150,048 31.06
Florida.............. 87,872 7.86 61,312 7.11 23,905 4.93
Illinois............. 43,181 3.86 27,663 3.21 -- --
Ohio................. 42,561 3.81 17,155 1.99 -- --
Georgia.............. 40,230 3.60 59,395 6.89 23,084 4.76
Virginia............. 27,722 2.48 17,126 1.99 13,138 2.71
Massachusetts........ 27,138 2.43 -- -- -- --
Maryland............. 24,582 2.21 19,625 2.28 11,748 2.42
North Carolina....... 23,826 2.13 13,648 1.58 5,144 1.06
Connecticut.......... 18,769 1.68 14,052 1.63 5,964 1.23
Delaware............. 13,012 1.16 14,254 1.65 10,823 2.23
Other................ 153,115 13.70 77,668 9.01 57,789 11.93
---------- ------ -------- ------ --------- ------
Total........... $1,117,439 100.00% $862,446 100.00% $ 484,575 100.00%
========== ====== ======== ====== ========= ======
Business Purpose Loans. Through our subsidiary, American Business
Credit, we currently originate business purpose loans on a regular basis in
Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Maryland, New
Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina and
Virginia through a network of salespeople and through our business loan web
site, www.abceasyloan.com. We focus our marketing efforts on small businesses
who do not meet all of the credit criteria of commercial banks and small
businesses that our research indicates may be predisposed to using our products
and services.
We originate business purpose loans to corporations, partnerships, sole
proprietors and other business entities for various business purposes including,
but not limited to, working capital, business expansion, equipment acquisition
and debt-consolidation. We do not target any particular industries or trade
groups and, in fact, take precautions against concentration of loans.
9
in any one industry group. All business purpose loans generally are
collateralized by a first or second mortgage lien on a principal residence of
the borrower or a guarantor of the borrower or some other parcel of real
property, such as office buildings, apartment buildings, or mixed use buildings
owned by the borrower. In addition, in most cases, these loans are further
collateralized by personal guarantees, pledges of securities, assignments of
contract rights, life insurance and lease payments and liens on business
equipment and other business
Our business purpose loans generally ranged from $15,000 to $500,000
and had an average loan size of approximately $89,000 for the loans originated
during fiscal 2000. Generally, our business purpose loans are made at fixed
rates and for terms ranging from five to 15 years. We generally charge
origination fees for these loans of 5.0% to 6.0% of the original principal
balance. The weighted average interest rate charged on the business purpose
loans originated by us was 15.99% for fiscal 2000. The business purpose loans we
originated during the past fiscal year had a weighted average loan-to-value
ratio, based solely upon the real estate collateral securing the loans, of
60.9%. We originated $106.2 million of business purpose loans during fiscal
2000.
Generally, we compute interest due on our outstanding loans using the
simple interest method. Where permitted by applicable law, we generally impose a
prepayment fee. Although prepayment fees imposed vary based upon applicable
state law, the prepayment fees on our business purpose loan documents generally
amount to a significant portion of the outstanding loan balance. We believe that
such prepayment terms tend to extend the average life of our loans by
discouraging prepayment which makes these loans more attractive for
securitization. Whether a prepayment fee is imposed and the amount of such fee,
if any, is negotiated between the individual borrower and American Business
Credit prior to closing of the loan.
During fiscal 2000, we launched an Internet loan distribution channel
under the name www.abceasyloan.com. The www.abceasyloan.com web site provides
borrowers with convenient access to the business loan application process, 7
days a week, 24 hours a day. We believe that the addition of this distribution
channel maximizes the efficiency of the application process and could reduce our
transaction costs in the future to the extent the volume of loan applications
received via the web page increases. Throughout the loan processing period,
borrowers who submit applications online are supported by our staff of highly
trained loan officers.
Home Equity Loans. We originate home equity loans through our Consumer
Mortgage Group which includes Upland Mortgage and New Jersey Mortgage. We also
purchase loans through Processing Service Center, Inc. We originate home equity
loans primarily to credit-impaired borrowers through various channels including
retail marketing which includes telemarketing operations, direct mail, radio and
television advertisements as well as through our interactive web site,
www.UplandMortgage.com. We entered the home equity loan market in 1991.
Currently, we are licensed to originate home equity loans in 47 states
throughout the United States.
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Home equity loans originated and funded by our subsidiaries are
generally securitized. In addition, we may sell home equity loans to one of
several third party lenders, at a premium and with servicing released.
Home equity loan applications are obtained from potential borrowers
over the phone, in writing, in person or over the Internet through our
interactive web site. The loan request is then processed and closed. The loan
processing staff generally provides its home equity borrowers with a loan
approval within 24 hours and closes its home equity loans within approximately
ten to fifteen days of obtaining a loan approval.
Home equity loans generally range from $10,000 to $250,000 and had an
average loan size of approximately $70,000 for the loans originated during
fiscal 2000. During fiscal 2000, we originated $949.0 million of home equity
loans. Generally, home equity loans are made at fixed rates of interest and for
terms ranging from five to 30 years. Such loans generally have origination fees
of approximately 2.0% of the aggregate loan amount. For fiscal 2000, the
weighted average interest rate received on such loans was 11.28% and the
weighted average loan-to-value ratio was 78.9% for loans originated during this
period. We attempt to maintain our interest and other charges on home equity
loans competitive with the lending rates of other finance companies and banks.
Where permitted by applicable law, a prepayment fee may be negotiated with the
borrower and is generally charged to the borrower on the prepayment of a home
equity loan except in the event the borrower refinances a home equity loan with
us.
Beginning in fiscal 1996, through Upland Mortgage and in conjunction
with Processing Service Center, Inc., we entered into exclusive business
arrangements with financial institutions which provide for Upland Mortgage's
purchase of home equity loans that meet our underwriting criteria but do not
meet the underlying guidelines of the selling institutions for loans held in
portfolio. This program is called the Bank Alliance Program. The Bank Alliance
Program is designed to provide an additional source of home equity loans. This
program targets traditional financial institutions, such as banks, which because
of their strict underwriting and credit guidelines have generally provided
mortgage financing only to the most credit-worthy borrowers. This program allows
these financial institutions to originate loans to credit-impaired borrowers in
order to achieve community reinvestment goals and to generate fee income and
subsequently sell such loans to Upland Mortgage. Following our purchase of the
loans through this program, we hold these loans as available for sale until they
are sold in connection with a future securitization. We believe that the Bank
Alliance Program is a unique method of increasing our production of home equity
loans.
Under this program, a borrower who fails to meet a financial
institution's underwriting guidelines for portfolio loans will be referred to
Processing Service Center, Inc. which will process the loan application and
underwrite the loan pursuant to Upland Mortgage's underwriting guidelines. If
the borrower qualifies under Upland Mortgage's underwriting standards, the loan
will be originated by the financial institution and subsequently sold to Upland
Mortgage.
Since the introduction of this program, we have entered into agreements
with 31 financial institutions to provide us with the opportunity to underwrite,
process and purchase loans
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generated by the branch networks of such institutions which consist of over
1,500 branches located in various states throughout the country. During fiscal
2000, Upland Mortgage purchased approximately $53.4 million of loans pursuant to
this program. We intend to continue to expand the Bank Alliance Program with
financial institutions across the United States.
During fiscal 1999, we launched an Internet loan distribution channel
under the name www.UplandMortgage.com. Through this interactive web site,
borrowers can examine available loan options, calculate interest payments, and
submit an application via the Internet. The Upland Mortgage Internet platform
provides borrowers with convenient access to the mortgage loan application
process, 7 days a week, 24 hours a day. Throughout the loan processing period,
borrowers who submit applications online are supported by our staff of highly
trained loan officers. During fiscal 2000, we continued to phase in advanced
Internet technology through our web site, www.UplandMortgage.com. In addition to
the ability to take online loan applications and utilize an automated rapid
credit approval process, both of which reduce time and manual effort required
for loan approval, the site features our proprietary software, Easy Loan Wizard,
which provides personalized services and solutions to retail customers through
interactive web dialog. We have applied to the U.S. Patent and Trademark Office
to patent this product.
Conventional First Mortgage Loans. We began offering conventional first
mortgage loans in October 1997 in connection with our acquisition of New Jersey
Mortgage. New Jersey Mortgage has been originating mortgage loans since 1939. We
originate conventional first mortgage loans and sell them in the secondary
market with servicing released. Our conventional first mortgage lending market
area is primarily the eastern region of the United States. We originated $42.6
million of conventional first mortgage loans during fiscal 2000.
The conventional first mortgage loans are secured by one-to four-unit
residential properties located primarily in the eastern region of the United
States. These properties are generally owner-occupied single family residences
but may also include second homes and investment properties. These loans are
generally made through American Household Mortgage, a division of New Jersey
Mortgage, to borrowers with favorable credit histories and are underwritten
pursuant to Freddie Mac or Fannie Mae standards to permit their sale in the
secondary market; however, we also originate first mortgage loans which do not
meet the Freddie Mac or Fannie Mae standards for sale in the secondary market.
Some of these first mortgage loans have balances in excess of $252,700 and are
commonly referred to as jumbo loans.
New Jersey Mortgage typically sells such loans to third parties with
servicing released. New Jersey Mortgage also originates Federal Housing
Authority, the FHA, and Veterans Administration, the VA, loans which are
subsequently sold to third parties with servicing released. This means that we
do not generally retain the right to collect and service these loans after they
are sold. New Jersey Mortgage originates such loans for sale in the secondary
market.
Equipment Leases. Prior to December 31, 1999, we also originated
equipment leases. Effective December 31, 1999, we de-emphasized the leasing
origination business as a result of our strategy of focusing on our most
profitable lines of business. We are continuing to service the remaining leases
in our managed portfolio, which totaled $119.0 million in gross receivables
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at June 30, 2000 and we may from time to time consider originating or purchasing
new leases. Equipment leases held in our portfolio included leases to
corporations, partnerships, other entities and sole proprietors on various types
of business equipment including, but not limited to, computer equipment,
automotive repair equipment, construction equipment, commercial equipment,
medical equipment and industrial equipment.
Generally, our equipment leases consist of two types: (i) finance
leases which have a term of 12 to 60 months and provide a purchase option
exercisable by the lessee at $1.00 or 10% of the original equipment cost at the
termination of the lease, and (ii) fair market value or true leases which have a
similar term, but provide a purchase option exercisable by the lessee at the
fair market value of the equipment at the termination of the lease. Our
equipment leases generally range in size from $2,000 to $250,000, with an
average lease size of approximately $19,000 for the leases originated during
fiscal 2000. Our leases generally had maximum terms of seven years. The weighted
average interest rates received on leases for fiscal 2000 was 11.25%. During
fiscal 2000, we originated $19.6 million of equipment leases. Generally, the
interest rates and other terms and conditions of our equipment leases are
competitive with the leasing terms of other leasing companies in our market
area.
There are risks inherent in holding a portfolio of leases which are
different than those risks inherent in our mortgage lending activities. See "--
Risk Factors -- If we experience losses in the value of our leased equipment
securing the leases we hold, our profitability may be reduced."
Prepayment Fees. Historically, we charged prepayment fees on a
significant percentage of our business purpose loans and on less than 50% of our
home equity loans. We currently charge prepayment fees on substantially all of
our business purpose loans, and have increased the percentage of home equity
loans originated with prepayment fees to approximately 85%. Home equity loans
comprise approximately 90% of all loans we originate and the remaining 10% are
business purpose loans. The type of prepayment fee we obtain on a home equity
loan is generally a certain percentage of the outstanding principal balance of
the loan. One typical prepayment fee provides for a fee of 5% of the outstanding
principal loan balance if paid within the first three years after the loan's
origination and 2% of the outstanding principal loan balance if prepaid between
three and five years after the loan's origination and no prepayment fee if the
loan is prepaid after five years from the date of origination. In the case of
business purpose loans, the prepayment fee generally amounts to a significant
portion of the outstanding principal loan balance and is most often calculated
on the basis of the Rule of 78s formula, also known as the "sum of the digits"
method.
Our ability to charge a prepayment fee is sometimes impacted by state
law, with respect to both home equity loans and business purpose loans. In the
case of home equity loans which have a "balloon" payment feature, whenever
possible, we use the Federal Alternative Mortgage Transactions Parity Act of
1982 referred to as the Parity Act to preempt state laws which limit or restrict
prepayment fees. In states which have overridden the Parity Act and in the case
of some fully amortizing home equity loans, state laws may restrict prepayment
fees either by the amount of the prepayment fee or the time period during which
it can be imposed. Similarly, in the case of
13
business purpose loans, some states prohibit or limit prepayment fees where the
loan is below a specific dollar threshold or is secured by residential real
property.
Marketing Strategy
We concentrate our marketing efforts primarily on two potential
customer groups. One group, based on historical profiles, has a tendency to
select our loan products because of our personalized service and timely response
to loan requests. The other group is comprised of credit-impaired borrowers who
satisfy our underwriting guidelines. We also market conventional first mortgage
loans to borrowers with favorable credit histories. See "-- Risk Factors -
Lending to credit-impaired borrowers may result in higher delinquencies in our
managed portfolio which could result in a reduction in profits."
Our marketing efforts for business purpose loans focus on our niche
market of selected small businesses located in our market area which generally
includes the eastern half of the United States. We target businesses which we
believe would qualify for loans from traditional lending sources but would elect
to use our products and services. Our experience has indicated that these
borrowers are attracted to us as a result of our marketing efforts, the
personalized service provided by our staff of highly trained lending officers
and our timely response to loan applications. Historically, such customers have
been willing to pay our origination fees and interest rates which are generally
higher than those charged by traditional lending sources.
We market business purpose loans through various forms of advertising,
our business loan web site, www.abceasyloan.com and a direct sales force.
Advertising media used includes large direct mail campaigns and newspaper and
radio advertising. Our commissioned sales staff, which consists of full-time
highly trained salespersons, is responsible for converting advertising leads
into loan applications. We use a proprietary training program involving
extensive and on-going training of our lending officers. Our sales staff uses
significant person-to-person contact to convert advertising leads into loan
applications and maintains contact with the borrower throughout the application
process. See "-- Lending and Leasing Activities - Business Purpose Loans."
We market home equity loans through telemarketing, radio and television
advertising, direct mail campaigns and through our web site,
www.UplandMortgage.com. During fiscal 2000, the Consumer Mortgage Group
redirected its marketing mix to focus on targeted direct mail, which we believe
delivers more leads at a lower cost than broadcast marketing channels. Our
integrated approach to media advertising which utilizes a combination of direct
mail and Internet advertising is intended to maximize the effect of our
advertising campaigns. We also use a network of loan brokers, the Bank Alliance
Program and our website as additional sources of loans.
Our marketing efforts for home equity loans are strategically located
throughout the eastern region of the United States. We currently utilize branch
offices in various eastern states to market our loans. We intend to open
additional sales offices in the future. Loan processing, underwriting, servicing
and collection procedures are performed at our centralized operating
14
office located in Bala Cynwyd, Pennsylvania. See "--Lending and Leasing
Activities-Home Equity Loans."
We market conventional first mortgage loans through our network of loan
brokers. Our marketing efforts for conventional first mortgage loans are
concentrated in the mid-Atlantic region of the United States. In addition, we
market conventional first mortgage loans under the name American Household
Mortgage. See "--Lending and Leasing Activities - Conventional First Mortgage
Loans."
Loan and Lease Servicing
Generally, we service the loans and leases we hold as available for
sale or which we securitize in accordance with our established servicing
procedures. Servicing includes collecting and transmitting payments to
investors, accounting for principal and interest, collections and foreclosure
activities, and selling the real estate or other collateral that is acquired. At
June 30, 2000, our total managed portfolio included approximately 32,000 loans
and leases with an aggregate outstanding balance of $1.9 billion. We generally
receive contractual servicing fees for our servicing responsibilities. In
addition, we receive other ancillary fees related to the loans and leases
serviced. Our servicing and collections activities are centralized at the
processing center located at our operating office in Bala Cynwyd, Pennsylvania.
In servicing loans and leases, we typically send an invoice to obligors
on a monthly basis advising them of the required payment and its due date. We
begin the collection process immediately after a borrower fails to make a
monthly payment. When a loan or lease becomes 45 to 60 days delinquent, it is
referred to our legal collection group for the initiation of foreclosure
proceedings or other legal remedies. In addition, after a loan or lease becomes
61 days delinquent, our loss mitigation unit becomes involved. Our loss
mitigation unit tries to reinstate a delinquent loan or lease, seek a payoff, or
occasionally enter into a modification agreement with the borrower to avoid
foreclosure. All proposed work-out arrangements are evaluated on a case-by-case
basis, based upon the borrower's past credit history, current financial status,
cooperativeness, future prospects and the reasons for the delinquency. If the
loan or lease becomes delinquent 61 days or more and a satisfactory work-out
arrangement with the borrower is not achieved or the borrower declares
bankruptcy, the foreclosure, replevin or other legal action is initiated. Legal
action may be initiated prior to a loan or lease becoming delinquent over 60
days if management determines that the circumstances warrant such action.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until it is sold. When property
is acquired or expected to be acquired by foreclosure or deed in lieu of
foreclosure, we record it at the lower of cost or estimated fair value, less
estimated cost of disposition. After acquisition, all costs incurred in
maintaining the property are accounted for as expenses.
Our ability to foreclose on some properties may be affected by state
and federal environmental laws. The costs of investigation, remediation or
removal of hazardous substances may be substantial and can easily exceed the
value of the property. The presence of hazardous substances, or the failure to
properly eliminate the substances from the property, can hurt the
15
owner's ability to sell or rent the property and prevent the owner from using
the property as collateral for a loan. Even people who arrange for the disposal
or treatment of hazardous or toxic substances also may be liable for the costs
of removal or remediation of the substances at the disposal or treatment
facility, whether or not the facility is owned or operated by the person who
arranged for the disposal or treatment. See "-- Risk Factors - Environmental
laws and regulations may restrict our ability to foreclose on loans secured by
real estate or increase costs associated with those loans which could reduce our
profitability."
As the servicer of securitized loans and leases, we are obligated to
advance funds for scheduled payments that have not been received from the
borrower unless we determine that our advances will not be recoverable from
subsequent collections in respect to the related loans or leases. See
"--Securitizations."
Underwriting Procedures and Practices
Summarized below are some of the policies and practices which are
followed in connection with the origination of business purpose loans, home
equity loans and conventional first mortgage loans. These policies and practices
may be altered, amended and supplemented as conditions warrant. We reserve the
right to make changes in our day-to-day practices and policies.
Our loan underwriting standards are applied to evaluate prospective
borrowers' credit standing and repayment ability as well as the value and
adequacy of the mortgaged property as collateral. Initially, the prospective
borrower is required to fill out a detailed application providing pertinent
credit information. As part of the description of the prospective borrower's
financial condition, the borrower is required to provide information concerning
assets, liabilities, income, credit, employment history and other demographic
and personal information. If the application demonstrates the prospective
borrower's ability to repay the debt as well as sufficient income and equity,
loan processing personnel generally obtain and review an independent credit
bureau report on the credit history of the borrower and verification of the
borrower's income. Once all applicable employment, credit and property
information is obtained, a determination is made as to whether sufficient
unencumbered equity in the property exists and whether the prospective borrower
has sufficient monthly income available to meet the prospective borrower's
monthly obligations.
16
The following table outlines the key parameters of the primary credit grades
contained in our current underwriting guidelines.
- ----------------------------------------------------------------------------------------------------
"A" Credit Grade "B" Credit Grade
- ---------------------------------- ------------------------------- --------------------------------
General Repayment Has good credit but might Pays the majority of accounts
have some minor delinquency. on time but has some 30-
and/or 60-day delinquency.
- ----------------------------------------------------------------------------------------------------
Existing Mortgage Loans Current at application time Current at application time
and a maximum of two 30-day and a maximum of 4 x 30-day
delinquencies in the past 12 delinquencies in the past 12
months. months.
- ----------------------------------------------------------------------------------------------------
Non-Mortgage Credit Major credit and installment Major credit and installment
debt should be current but debt can exhibit some minor 30
may exhibit some minor 30-day and/or 60 day delinquency.
delinquency. Minor credit Minor credit may exhibit up to
may exhibit some minor 90-day delinquency.
delinquency.
- ----------------------------------------------------------------------------------------------------
Bankruptcy Filings Discharged more than 2 years Discharged more than 2 years
with reestablished credit. with reestablished credit.
- ----------------------------------------------------------------------------------------------------
Debt Service-to-Income Generally not to exceed 50%. Generally not to exceed 50%.
- ----------------------------------------------------------------------------------------------------
Owner Occupied: Generally 80% (or 90%) for a Generally 80% (or 85%) for a 1
Loan-to-value ratio 1-4 family dwelling to 4 family dwelling
residence; 80% for a residence; 75% for a
condominium. condominium.
- ----------------------------------------------------------------------------------------------------
Non-Owner Occupied: Generally 80% for a 1 to 2 Generally 70% for a 1 to 2
Loan-to-value ratio family dwelling or family dwelling or condominium;
condominium; 90% for a 3 to 4 70% for a 3 to 4 family.
family.
- ----------------------------------------------------------------------------------------------------
[RESTUBBED]
- -------------------------------------------------------------------------------------------------------
"C" Credit Grade "D" Credit Grade
- ---------------------------------- --------------------------------- ---------------------------------
General Repayment Marginal credit history which Designed to provide a borrower
is offset by other positive with poor credit history an
attributes. opportunity to correct past
credit problems through lower
monthly payments.
- -------------------------------------------------------------------------------------------------------
Existing Mortgage Loans Cannot exceed four 30-day Must be paid in full from loan
delinquencies or 2 60-day proceeds and no more than 120
delinquencies in the past 12 days delinquent.
months.
- -------------------------------------------------------------------------------------------------------
Non-Mortgage Credit Major credit and installment Major and minor credit
debt can exhibit some minor 30- delinquency is acceptable, but
and/or 90-day delinquency. must demonstrate some payment
Minor credit may exhibit more regularity.
serious delinquency.
- -------------------------------------------------------------------------------------------------------
Bankruptcy Filings Discharged more than 2 years Discharged prior to closing.
with reestablished credit.
- -------------------------------------------------------------------------------------------------------
Debt Service-to-Income Generally not to exceed 55%. Generally not to exceed 55%.
- -------------------------------------------------------------------------------------------------------
Owner Occupied: Generally 70% (or 85%) for a 1 Generally 60% (or 70%) for a 1
Loan-to-value ratio to 4 family dwelling residence; to 4 family dwelling residence.
65% for a condominium.
- -------------------------------------------------------------------------------------------------------
Non-Owner Occupied: Generally 60% for a 1 to 2 N/A
Loan-to-value ratio family dwelling or condominium;
60% for a 3 to 4 family.
- -------------------------------------------------------------------------------------------------------
17
Generally, business purpose loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the independent
appraised fair market value of the real estate collateral securing the loan) on
the properties collateralizing the loans of no greater than 75%. Business
purpose loans collateralized by commercial real estate must generally have an
overall loan-to-value ratio (based solely on the independent appraised fair
market value of the real estate collateral securing the loan) of no greater than
60%. In addition, in substantially all instances, we also receive additional
collateral in the form of, among other things, personal guarantees, pledges of
securities, assignments of contract rights, life insurance and lease payments
and liens on business equipment and other business assets, as available. The
business purpose loans we originated had an average loan-to-value ratio of 60.9%
based solely on the real estate collateral securing the loan for fiscal 2000.
The maximum acceptable loan-to-value ratio for home equity loans held
as available for sale or securitized is generally 90%. The home equity loans we
originated had an average loan-to-value ratio of 78.9% for fiscal 2000.
Occasionally, exceptions to these maximum loan-to-value ratios are made if other
collateral is available or if there are other compensating factors. From time to
time, we make loans with loan-to-value ratios in excess of 90% which may be sold
with servicing released. Title insurance is generally obtained in connection
with all real estate secured loans.
We generally do not lend more than 95% of the appraised value in the
case of conventional first mortgage loans, other than Federal Housing Authority
and Veterans Administration Loans. The conventional first mortgage loans we
originated had an average loan-to-value ratio of 83.7% for fiscal 2000. We
generally require private mortgage insurance on all conventional first mortgage
loans with loan-to-value ratios in excess of 80% at the time of origination in
order to reduce our exposure. We obtain mortgage insurance certificates from the
FHA on all FHA loans and loan guaranty certificates from the VA on all VA loans
regardless of the loan-to-value ratio on the underlying loan amount.
We believe that the consistent application of the criteria described
above may mitigate some of the risks associated with lending to non-conforming
borrowers.
In determining whether the mortgaged property is adequate as
collateral, we have each property considered for financing appraised. The
appraisal is completed by an independent qualified appraiser and generally
includes pictures of comparable properties and pictures of the property securing
the loan. With respect to business purpose loans, home equity loans and
conventional first mortgage loans, the appraisal is completed by an independent
qualified appraiser on a Fannie Mae form.
Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made by us, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. As a result, we cannot assure
that the market value of the real estate underlying the loans will at any time
be equal to or in excess of the outstanding principal amount of those loans.
Although we have expanded the geographic area in which we
18
originate loans, a downturn in the economy generally or in a specific region of
the country may have an effect on our originations. See "-- Risk Factors - A
decline in value of the collateral securing our loans could result in an
increase in losses on foreclosure which could reduce our profitability."
Loan Administration Procedures
We employ a large staff of experienced collectors and supervisors
working in shifts to manage non-performing loans. In addition, several in-house
collection attorneys and paralegals work closely with these collectors and their
managers to optimize collection efforts. The goal of our labor-intensive
collections program is to emphasize delinquency prevention.
In servicing business purpose loans and home equity loans, we typically
send an invoice to borrowers on a monthly basis advising them of the required
payment and its due date. We begin the collection process immediately after a
borrower fails to make a monthly payment. We believe we begin the collection
process earlier than lenders who provide financing to credit worthy borrowers.
When a loan becomes 45 to 60 days delinquent, it is transferred to a workout
specialist in the collections department. The workout specialist tries to
reinstate a delinquent loan, seek a payoff, or occasionally enter into a
modification agreement with the borrower to avoid foreclosure. All proposed
workout arrangements are evaluated on a case-by-case basis, based upon the
borrower's past credit history, current financial status, cooperativeness,
future prospects and the reasons for the delinquency. If the loan becomes
delinquent 61 days or more and a satisfactory workout arrangement with the
borrower is not achieved or the borrower declares bankruptcy, the matter is
immediately referred to our attorneys for collection. Due to this timing, the
foreclosure process on most delinquent loans is commenced before the loan is 100
days past due.
To our knowledge, we are one of very few lenders that has an in-house
legal staff dedicated to the collection of delinquent loans and the handling of
bankruptcy cases. As a result, we believe our delinquent loans are reviewed from
a legal perspective earlier in the collection process than is the case with
loans made by traditional lenders so that troublesome legal issues can be noted
and, if possible, resolved earlier. Our in-house legal staff also attempts to
find solutions for delinquent loans, other than foreclosure. Every loan is
analyzed to compare the property value against the loan balance and solutions
are presented to the borrower based on the results of that analysis.
In those situations where foreclosures are handled by outside counsel,
the in-house legal staff manages outside counsel to ensure that the time period
for handling foreclosures meets or exceeds established industry standards.
Frequent contact between in-house and outside counsel insures that the process
moves quickly and efficiently in an attempt to achieve a timely and economical
resolution to contested matters.
19
Securitizations
Since 1995, we have completed 19 securitization transactions. The 19
pools of loans and leases securitized were comprised of approximately $305.7
million of business purpose loans, approximately $1.8 billion of home equity
loans and approximately $161.6 million of equipment leases. During fiscal 2000,
we securitized $104.5 million of business purpose loans, $887.9 million of home
equity loans and $9.3 million of equipment leases.
Securitization is a financing technique often used by originators of
financial assets to raise capital. A securitization involves the transfer of a
pool of financial assets, in our case loans or leases, to a trust in exchange
for cash and a retained interest in the securitized loans and leases which is
called an interest-only strip. The trust issues multi class securities which
derive their cash flows from a pool of securitized loans and leases. These
securities, which are senior to our interest-only strips in the trust, are sold
to public investors. We also retain servicing on securitized loans and leases.
See "--Loan and Lease Servicing."
As the holder of the interest-only strip received in a securitization,
we are entitled to receive excess (or residual) cash flows. These cash flows are
the difference between the payments made by the borrowers on the loans and
leases and the sum of the scheduled and prepaid principal and pass-through
interest paid to the investors in the trust, servicing fees, trustee fees and,
if applicable, surety fees. Surety fees are paid to an unrelated insurance
entity to provide protection for the trust investors. Overcollateralization is
the excess of the aggregate principal balances of loans and leases in a
securitized pool over investor interests. Overcollateralization requirements are
established to provide additional protection for the trust investors.
We may be required either to repurchase or to replace loans or leases
which do not conform to the representations and warranties we made in the
pooling and servicing agreements entered into when the loans or leases are
pooled and sold through securitizations. As of June 30, 2000, we had not been
required to repurchase or replace any such loans or leases.
When borrowers are delinquent in making scheduled payments on loans or
leases included in a securitization trust, we are required to advance interest
payments with respect to such delinquent loans or leases to the extent that we
determine that such advances will be ultimately recoverable. These advances
require funding from our capital resources but have priority of repayment from
the succeeding month's collection.
While we are under no obligation to do so, at times we elect to
repurchase some foreclosed and delinquent loans from the securitization trusts.
Under the terms of the securitization agreements, repurchases are permitted only
for foreclosed and delinquent loans and the purchase prices are at the loans'
outstanding contractual balance. We elect to repurchase loans in situations
requiring more flexibility for the administration and collection of these loans
in order to maximize their economic recovery and to avoid temporary
discontinuations of residual or stepdown overcollateralization cash flows from
securitization trusts.
20
Our securitizations often include a prefunding option where a portion
of the cash received from investors is withheld until additional loans or leases
are transferred to the trust. The loans or leases to be transferred to the trust
to satisfy the prefund option must be substantially similar in terms of
collateral, size, term, interest rate, geographic distribution and loan-to-value
ratio as the loans or leases initially transferred to the trust. To the extent
we fail to originate a sufficient number of qualifying loans or leases for the
prefunded account within the specified time period, our earnings during the
quarter in which the funding was to occur would be reduced.
The securitization of loans and leases generated gains on sale of loans
and leases for fiscal 2000 of $90.4 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Securitization
Accounting Considerations."
Subject to market conditions, we anticipate that we will continue to
securitize business purpose loans and home equity loans. We believe that a
securitization program provides a number of benefits by allowing us to diversify
our funding base, provide liquidity and lower our cost of funds.
Competition
We compete for business purpose loans against many other finance
companies and financial institutions. Although many other entities originate
business purpose loans, we have focused our lending efforts on our niche market
of businesses which may qualify for loans from traditional lending sources but
who we believe are attracted to our products as a result of our marketing
efforts, responsive customer service and rapid processing and closing periods.
We have significant competition for home equity loans. Through Upland
Mortgage and New Jersey Mortgage, we compete with banks, thrift institutions,
mortgage bankers and other finance companies, which may have greater resources
and name recognition. We attempt to mitigate these factors through a highly
trained staff of professionals, rapid response to prospective borrowers'
requests and by maintaining a relatively short average loan processing time. In
addition, we implemented our Bank Alliance Program in order to generate
additional loan volume.
The various segments of our lending businesses are highly competitive.
See "-- Risk Factors - Competition from other lenders could adversely affect our
profitability."
Regulation
General. Our business is regulated by both federal and state laws. All
home equity and conventional first mortgage loans must meet the requirements of,
among other statutes and regulations, the Truth in Lending Act, the Real Estate
Settlement Procedures Act, the Equal Credit Opportunity Act of 1974, Federal
Reserve Board Regulations Z and B and Department of Housing and Urban
Development Regulation X.
Truth in Lending. The Truth in Lending Act and Regulation Z contain
disclosure requirements designed to provide consumers with uniform,
understandable information about the
21
terms and conditions of loans and credit transactions so that consumers may
compare credit terms. The Truth in Lending Act also guarantees consumers a
three-day right to cancel some transactions described in the Act and imposes
specific loan feature restrictions on some loans including the same type
originated by us. We believe that we are in compliance with the Truth in Lending
Act in all material respects. If we were found not to be in compliance with the
Truth in Lending Act, some aggrieved borrowers could have the right to rescind
their loans and/or to demand, among other things, the return of finance charges
and fees paid to us. Other fines and penalties can also be imposed under the
Truth in Lending Act and Regulation Z.
Equal Credit Opportunity and Other Laws. We are also required to comply
with the Equal Credit Opportunity Act and Regulation B, which prohibit creditors
from discriminating against applicants on the basis of race, color, religion,
national origin, sex, age or marital status. Regulation B also restricts
creditors from obtaining specific types of information from loan applicants.
Among other things, it also requires certain disclosures by the lender regarding
consumer rights and requires lenders to advise applicants of the reasons for any
credit denial. We are also required to report statistical information on loan
applicants to the Department of Housing and Urban Development which monitors
compliance with fair lending laws.
In instances where the applicant is denied credit or the rate of
interest for a loan increases as a result of information obtained from a
consumer credit reporting agency, the Fair Credit Reporting Act of 1970, as
amended, requires lenders to supply the applicant with the name and address of
the reporting agency whose credit report was used in determining to reject a
loan application. It also requires that lenders provide other information and
disclosures about the loan application rejection. In addition, we are subject to
the Fair Housing Act and regulations under the Fair Housing Act, which broadly
prohibit specific discriminatory practices in connection with our home equity
lending business.
We are also subject to the Real Estate Settlement Procedures Act and
Regulation X. These laws and regulations impose limits on the amount of funds a
borrower can be required to deposit with us in any escrow account for the
payment of taxes, insurance premiums or other charges; limits the fees which may
be paid to third parties; and imposes various disclosure requirements.
We are subject to various other federal and state laws, rules and
regulations governing the licensing of mortgage lenders and servicers,
procedures that must be followed by mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
these laws, as well as with the laws described above, may result in civil and
criminal liability.
Several of our subsidiaries are licensed and regulated by the
departments of banking or similar entities in the various states in which they
are licensed. The rules and regulations of the various states impose licensing
and other restrictions on lending activities such as prohibiting discrimination
and regulating collection, foreclosure procedures and claims handling, payment
features, and, in some cases, these laws fix maximum interest rates and fees.
Failure to comply with these requirements can lead to termination or suspension
of licenses, rights of rescission for mortgage loans, individual and class
action lawsuits and administrative enforcement actions.
22
Upland Mortgage and New Jersey Mortgage maintain compliance with the various
federal and state laws through its in-house counsel and outside counsel which
review their documentation and procedures and monitor and inform them of various
changes in the laws.
The previously described laws and regulations are subject to
legislative, administrative and judicial interpretation. Some of these laws and
regulations have recently been enacted. Some of these laws and regulations are
rarely challenged in or interpreted by the courts. Infrequent interpretations of
these laws and regulations or an insignificant number of interpretations of
recently enacted regulations can make it difficult for us to know what is
permitted conduct under these laws and regulations. Any ambiguity under the laws
and regulations to which we are subject may lead to regulatory investigations or
enforcement actions and private causes of action, such as class action lawsuits,
with respect to our compliance with the applicable laws and regulations. See "--
Risk Factors - Our residential lending business is subject to government
regulation and licensing requirements which may hinder our ability to operate
profitably."
Federal and state government agencies have recently begun to consider,
and in some instances have adopted, legislation to restrict lenders' ability to
charge rates and fees in connection with subprime residential mortgage loans and
loans to borrowers with problem credit. This legislation also imposes various
loan term restrictions, e.g., limits on balloon loan features. Frequently
referred to generally as "predatory lending" legislation, the legislation may
limit our ability to impose fees, charge interest rates on consumer loans to
those borrowers with problem credit and may impose additional regulatory
restrictions on our business.
The Gramm-Leach-Bliley Act, which was signed into law at the end of
1999, contains comprehensive consumer financial privacy restrictions. The
various federal enforcement agencies, including the Federal Trade Commission,
have issued final regulations to implement this act; however, compliance with
the new regulations is voluntary until July 1, 2001. These restrictions fall
into two basic categories. First, a financial institution must provide various
notices to consumers about an institution's privacy policies and practices.
Second, this act gives consumers the right to prevent the financial institution
from disclosing non-public personal information about the consumer to
non-affiliated third parties, with exceptions. As with any new regulations, we
intend to prepare the appropriate disclosures and internal procedures to assure
compliance with these new requirements.
Although we believe that we have implemented systems and procedures to
make sure that we comply with regulatory requirements, if more restrictive laws,
rules and regulations are enacted or more restrictive judicial and
administrative interpretations of those laws are issued, compliance with the
laws could become more expensive or difficult.
Truth in Savings. If we receive the regulatory approval to operate an
industrial loan company, we will offer certificates of deposit through our
industrial loan company and will be subject to the disclosure requirements
contained in the Truth in Savings Act and Regulation DD which require depository
institutions to provide uniform disclosures to consumers about the rates and
terms of certificates of deposit and other retail deposit accounts. These
disclosures enable consumers to make meaningful comparisons among depository
institutions. Failure to comply
23
with these disclosure requirements would subject the depository institution to
claims for damages from account holders, as well as, other fines and penalties
imposed by the regulatory agencies.
Federal Deposit Insurance Corporation. If we receive the regulatory
approval to operate an industrial loan company, the deposits of our industrial
loan company will be insured by the Federal Deposit Insurance Corporation up to
limits permitted by applicable law. As such, the Federal Deposit Insurance
Corporation will exercise primary regulatory supervision over our industrial
loan company. The Federal Deposit Insurance Corporation will also oversee the
compliance of our industrial loan company with consumer protection laws and
regulations applicable to lending and deposit products, as set forth above. In
addition, if we receive regulatory approval to operate an industrial loan
company, the Federal Deposit Insurance Corporation will establish the reporting,
capital and reserve requirements of our industrial loan company in accordance
with the Federal Deposit Insurance Act. Currently, we are unable to predict what
capital requirements will be imposed on our industrial loan company. If our
industrial loan company fails to comply with the applicable regulatory
requirements, the industrial loan company would be subject to enforcement
actions by the Federal Deposit Insurance Corporation.
There are risks inherent in our leasing activities which are different
than those risks inherent in our mortgage lending activities. See "--Risk
Factors--If we experience losses in the value of our leased equipment securing
the leases we hold, our profits may be reduced."
Risk Factors
Since we have historically experienced negative cash flows from our operations
and expect to do so in the foreseeable future, our ability to repay the
investment notes could be impaired.
We have historically experienced negative cash flow from operations
since 1996 primarily because our strategy of selling loans through
securitization requires us to build an inventory of loans over time. During the
period we are building this inventory of loans, we incur costs and expenses. We
do not recognize a gain on the sale of loans until we complete a securitization,
which may not occur until a subsequent period. In addition, our gain on a
securitization results from our retained interests in the securitized loans,
consisting primarily of interest-only strips, which do not generate cash flow
immediately. We expect this negative cash flow from operations to continue in
the foreseeable future. Should we continue to experience negative cash flows
from operations, it could impair our ability to make principal and interest
payments due under the terms of the investor notes. At June 30, 2000, there was
$177.7 million of investment notes which will mature through June 30, 2001.
We obtain the funds to repay the investment notes at their maturities
by securitizing our loans, selling whole loans and selling additional investment
notes. We may in the future generate cash flows by securitizing or selling
interest-only strips and selling servicing rights generated in past
securitizations. If we are unable in the future to securitize our loans, to sell
whole loans, or to realize cash flows from interest-only strips and servicing
rights generated in past securitizations,
24
our ability to repay the investment notes could be impaired. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Our estimates of the value of interest-only strips and servicing rights we
retain when we securitize loans could be inaccurate and could result in reduced
profits.
We generally retain interest-only strips and servicing rights in the
securitization transactions we complete. We estimate the fair value of the
interest-only strips and servicing rights based upon discount rates established
by management of our company and prepayment and default assumptions. Together,
these two assets represent 59.5% of our total assets at June 30, 2000. The value
of our interest-only strips totaled $277.9 million and the value of our
servicing rights totaled $74.9 million at June 30, 2000. Although we believe
that these amounts represent the fair value of these assets, the amounts were
estimated based on discounting the expected cash flows to be received in
connection with our securitizations using discount rates, established by us,
prepayment rates and default rate assumptions. Changes in market interest rates
may impact our discount rate assumptions and our actual prepayment and default
experience may vary materially from these estimates. Even a small unfavorable
change in these assumptions utilized could have a significant adverse impact on
the value of these assets. In the event of an unfavorable change in these
assumptions, the fair value of these assets would be overstated, requiring an
adjustment which would adversely affect our income in the period of adjustment.
During the year ended June 30, 2000, a write down of $12.6 million was
recorded on our interest-only strips. The write down included a charge of $11.2
million related to an increase from 11% to 13% in the discount rate used to
value our interest-only strips. This change in the discount rate was considered
a permanent fair value adjustment and was recorded as expense in fiscal 2000.
The write down also included a charge of $1.9 million for the impact of changes
in the one-month LIBOR which was deemed to be permanent. As a result of these
changes, we had a loss of $5.0 million for the fourth quarter of fiscal 2000 and
reported net income of $6.4 million for the year ended June 30, 2000 as compared
to net income of $14.1 million for the year ended June 30, 1999. In addition, we
changed the prepayment assumptions used to value our interest-only strips and
servicing rights to reflect actual experience. The effect of these changes was a
$0.5 million increase in our interest-only strips which is netted in the $12.6
million write down above, and a $0.7 million write down on the value of our
servicing rights. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Since we depend upon the availability of financing to fund our continuing
operations, any failure to obtain adequate funding could hurt our profitability.
For our ongoing operations, we depend upon frequent financings,
including the sale of unsecured subordinated debt securities and warehouse
credit facilities or lines of credit. If we are unable to renew or obtain
adequate funding under a warehouse credit facility, or other borrowings, the
lack of adequate funds would reduce our profitability. To the extent that we are
not successful in maintaining or replacing existing subordinated debt securities
upon maturity, we may have to limit our loan originations or sell loans earlier
than intended and restructure our operations. Limiting our originations or
earlier sales of loans could reduce our profitability. See
25
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Lending to credit-impaired borrowers may result in higher delinquencies in our
managed portfolio which could result in a reduction in profits.
We market a significant portion of our loans to borrowers who are
either unable or unwilling to obtain financing from traditional sources, such as
commercial banks. Loans made to these borrowers may entail a higher risk of
delinquency and loss than loans made to borrowers who use traditional financing
sources. Historically, we have experienced a higher rate of delinquencies on
loans made to these credit-impaired borrowers as compared to delinquency rates
experienced by banks on loans to conforming borrowers. While we use underwriting
standards and collection procedures designed to mitigate the higher credit risk
associated with lending to these borrowers, our standards and procedures may not
offer adequate protection against risks of default. Higher than anticipated
delinquencies, foreclosures or losses in our sold and serviced loans would
reduce our profits. See "-- Lending and Leasing Activities" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Our reliance upon the sale of our loans through securitization may result in
fluctuating operating results.
In recent periods, a significant portion of our revenue and net income
represented gain on the sale of loans and leases in securitization transactions.
Operating results for a given period can fluctuate significantly as a result of
the timing and size of securitizations. If we do not close securitizations when
expected, we could experience a loss for a period. In addition, we rely
primarily on securitizations to generate cash proceeds for the repayment of our
warehouse credit facilities and origination of additional loans.
Our ability to complete securitizations depends on several factors,
including:
o conditions in the securities markets generally including
market interest rates;
o conditions in the asset-backed securities markets
specifically; and
o the credit quality of our managed portfolios.
Any substantial impairment in the size or availability of the market for our
loans could result in our inability to continue to originate loans and repay the
investment notes upon maturity. See "--Securitizations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Securitizations."
A change in market interest rates may result in a reduction in our profits.
Rapid changes, either upward or downward, in interest rates may
adversely affect our profits. Any future rise in interest rates may:
o reduce customer demand for our products;
o widen investor spread requirements and increase
overcollateralization
26
requirements in future securitizations;
o increase our cost of funds;
o reduce the spread between the rate of interest we receive on loans
and interest rates we must pay under our outstanding credit
facilities and debt securities;
o reduce the profit we will realize in securitizations or other sales
of loans; and
o limit our access to borrowings in the capital market.
Gain on sale of loans may be unfavorably impacted to the extent that we
hold fixed rate mortgages prior to securitization and a change in rates reduces
the spread between the average coupon rate on fixed rate loans and the weighted
average pass-through rate to investors for interests issued in connection with
the securitization. Although the average loan coupon rate is fixed at the time
the loan is originated, the pass-through rate to investors is not fixed until
the pricing of the securitization which occurs just prior to the sale of the
loans. Therefore, if market rates required by investors increase prior to
securitization of the loans, the spread between the average coupon rate on the
loans and the pass-through rate to investors may be reduced or eliminated which
would reduce or eliminate our profit on the sale of the loans. In addition, an
increase in interest rates could increase interest costs on all sources of
borrowed funds and reduce spreads on securitized loans which could negatively
impact our liquidity and capital resources by reducing cash flows which would
decrease our profitability.
Since a portion of the certificates issued to investors by
securitization trusts are floating rate certificates, the interest rates on
these certificates adjust based on an established index plus a spread. The fair
value of the excess cash flow we will receive from these trusts would be reduced
as a result of any increases in rates paid on the floating certificates. At June
30, 2000, $253.9 million of debt issued by securitization was floating rate debt
representing 13.8% of total debt issued by securitization trusts.
If we are not able to sustain the levels of growth in revenues and earnings that
we experienced in the past our future profits may be reduced.
During fiscal 2000, we experienced record levels of total revenue and
net income as a result of increases in loan originations and the securitization
of loans. Our ability to sustain the level of growth in total revenue and net
income experienced in the past depends upon a variety of factors outside our
control, including:
o interest rates,
o conditions in the asset-backed securities markets,
o economic conditions in our primary market area,
o competition, and
o regulatory restrictions.
Our ability to sustain the levels of growth experienced in the past will become
increasingly difficult in light of rising interest rates experienced during
fiscal 2000 as compared to a falling or stable interest rate environment. If we
are unable to sustain our levels of growth, our profits may
27
be reduced. See "A change in market interest rates may result in a reduction in
our profits" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Decreasing market interest rates could reduce our profitability due to the
length of maturities of our outstanding subordinated debt.
We are subject to risks associated with changes in interest rates to
the extent that we have issued fixed rate subordinated debt securities with
scheduled maturities of one to ten years. At June 30, 2000, we had $212.9
million of subordinated debt securities with scheduled maturities greater than
one year, which is not subject to early redemption at our option. If market
interest rates decrease in the future, the rates paid on our long term
subordinated debt could exceed the current market rate paid for similar
instruments which could result in a reduction in our profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Risk Management."
If we are unable to continue to successfully implement our business strategy,
our revenues may decrease.
Our business strategy seeks to increase our loan volume through further
development of existing markets while maintaining our customary origination
fees, the spread between loan interest rates and the interest rates we pay for
capital and underwriting criteria. Implementation of this strategy will depend
in large part on our ability to:
o open or expand offices in markets with a sufficient concentration
of borrowers who meet our underwriting criteria;
o obtain adequate financing on favorable terms;
o profitably securitize our loans in the secondary market on a
regular basis;
o hire, train and retain skilled employees;
o successfully implement our marketing campaigns; and
o continue to expand in the face of increasing competition from other
lenders.
Our inability to achieve any or all of these factors could impair our ability to
implement our business strategy and successfully leverage our fixed costs which
could result in a reduction in our revenues. See "--Lending and Leasing
Activities."
If loan prepayment rates are higher than anticipated, our profits could be
reduced.
A significant decline in market interest rates could increase the level
of loan prepayments, which would decrease the size of the total managed loan
portfolio and the related projected cash flows. Higher than anticipated rates of
loan prepayments could require a write down of the fair value of the related
interest-only strips and servicing rights, adversely impacting earnings during
the period of adjustment which would result in a reduction in our profitability.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
28
A decline in real estate values could result in a reduction in originations
which could reduce our revenues.
Our business may be adversely affected by declining real estate values.
Any significant decline in real estate values reduces the ability of borrowers
to use home equity as collateral for borrowings. This reduction in real estate
values may reduce the number of loans we are able to make, which will reduce the
gain on sale of loans and servicing and origination fees we will collect which
could reduce our revenues. See "-- Lending and Leasing Activities" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
A decline in value of the collateral securing our loans could result in an
increase in losses on foreclosure which could reduce our profitability.
Declining real estate values will also increase the loan-to-value
ratios of loans we previously made, which in turn, increases the probability of
a loss in the event the borrower defaults and we have to sell the mortgaged
property. In addition, delinquencies and foreclosures generally increase during
economic slowdowns or recessions. As a result, the market value of the real
estate or other collateral underlying our loans may not, at any given time, be
sufficient to satisfy the outstanding principal amount of the loans. See
"--Lending and Leasing Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
If we experience losses in the value of our leased equipment securing the leases
we hold, our profitability may be reduced.
The equipment which secures the leases we hold is subject to the risk
of damage, destruction or obsolescence prior to the termination of the lease. In
the case of our fair market value leases, lessees may choose not to exercise
their option to purchase the equipment for its fair market value at the
termination of the lease. When this happens, we may have to sell the equipment
to third party buyers at a discount which may result in reduced profitability.
See "--Lending and Leasing Activities."
If we are unable to implement an effective hedging strategy, our net income may
be reduced.
We have implemented a hedging strategy in an attempt to mitigate the
effect of changes in interest rates on our fixed rate mortgage loans prior to
securitization that involves the use of derivative financial instruments such as
futures, interest rate swaps and forward pricing of securitizations. An
effective hedging strategy is complex and no strategy can completely insulate us
from interest rate risk. In fact, poorly designed strategies or improperly
executed transactions may increase rather than mitigate interest rate risk.
Hedging involves transaction and other costs, and these costs could increase as
the period covered by the hedging protection increases or in periods of rising
and fluctuating interest rates. In addition, this interest rate hedging strategy
may not be effective against the risk that the difference between the treasury
rate and the rate needed to attract potential buyers of asset backed securities
may widen. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Interest Rate Risk Management."
29
Competition from other lenders could adversely affect our profitability.
The lending markets that we compete in are highly competitive. Some
competing lenders have substantially greater resources, greater experience,
lower cost of funds, and a more established market presence than we have. If our
competitors increase their marketing efforts to include our market niche of
borrowers, we may be forced to reduce the rates and fees we currently charge in
order to maintain and expand our market share. Any reduction in our rates or
fees could have an adverse impact on our profitability. Our profitability and
the profitability of other similar lenders may attract additional competitors
into this market. See "Competition."
An economic downturn in the eastern half of the United States could result in
reduced profitability.
We currently originate loans primarily in the eastern half of the
United States. The concentration of loans in a specific geographic region
subjects us to the risk that a downturn in the economy in the eastern half of
the country would more greatly affect us than if our lending business were more
geographically diversified. As a result, an economic downturn in this region
could result in reduced profitability. See "-- Lending and Leasing Activities"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our securitization agreements require us to retain some risk on loans that do
not meet the requirements in these agreements which could result in a reduction
in profitability.
Although we sell substantially all of the loans we originate through
securitizations, all of the securitization agreements require that we replace or
repurchase loans which do not conform to the representations and warranties made
by us at the time of sale. Additionally, when borrowers are delinquent in making
monthly payments on loans included in a securitization trust, we are required to
advance interest payments for the delinquent loans if we deem that the advances
will be ultimately recoverable. These advances require funding from our capital
resources but have priority of repayment from the succeeding month's
collections. See "-- Securitizations."
Our residential lending business is subject to government regulation and
licensing requirements which may hinder our ability to operate profitably.
Our residential lending business is subject to extensive regulation,
supervision and licensing by various state departments of banking or financial
services. Our lending business is also subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on all or part
of our home equity and conventional first mortgage lending activities. We are
also subject to examinations by state departments of banking or financial
services in the 47 states where we are licensed with respect to originating,
processing, underwriting, selling and servicing home equity loans and
conventional first mortgage loans. We are also subject to Federal Reserve Board
regulations related to residential mortgage lending and servicing and the
Department of Housing and Urban Development regulation and reporting
requirements. Failure to comply with these requirements can lead to, among other
remedies, termination or suspension
30
of licenses, rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Federal and state government agencies have recently begun to consider,
and in some instances have adopted, legislation to restrict lenders' ability to
charge rates and fees in connection with subprime residential mortgage loans and
loans to borrowers with problem credit. This legislation also imposes various
loan term restrictions, e.g., limits on balloon loan features. Frequently
referred to generally as "predatory lending" legislation, such legislation may
limit our ability to impose certain fees, charge certain interest rates on
certain consumer loans and may impose additional regulatory restrictions on our
business.
Although we believe that we have implemented systems and procedures to
facilitate compliance with these requirements, more restrictive laws, rules and
regulations may be adopted in the future that could make compliance more
difficult or expensive and hinder our ability to operate profitably. See "--
Regulation."
Claims by borrowers or investors could result in reduced profitability.
In the ordinary course of our business, we are subject to claims made
against us by borrowers and private investors arising from, among other things:
o losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentation, error
and omission by our employees, officers and agents (including our
appraisers);
o incomplete documentation; and
o failure to comply with various laws and regulations applicable to
our business.
Although no material claims or legal actions are currently assessed
against us, any claims asserted in the future may result in legal expenses,
liability and reduced profitability. See "--Legal Proceedings."
We depend on the services of key people, and the loss of any of these people
could disrupt our operations and result in reduced profitability.
The success of our operations depends on the continued employment of
our senior level management. If key members of the senior level management were
for some reason unable to perform their duties or were to leave us for any
reason, we may not be able to find capable replacements which could disrupt
operations and result in reduced profitability.
Environmental laws and regulations may restrict our ability to foreclose on
loans secured by real estate or increase costs associated with those loans which
could reduce our profitability.
Our ability to foreclose on the real estate collateralizing our loans
may be limited by environmental laws which pertain primarily to commercial
properties that require a current or previous owner or operator of real property
to investigate and clean up hazardous or toxic
31
substances or chemical releases on the property. In addition, the owner or
operator may be held liable to a governmental entity or to third parties for
property damage, personal injury, investigation and cleanup costs relating to
the contaminated property. While we would not knowingly make a loan
collateralized by real property that was contaminated, it is possible that the
environmental contamination would not be discovered until after we had made the
loan.
To date there have been three instances where we have determined not to
foreclose on the real estate collateralizing a delinquent loan because of
environmental considerations. Any losses we may sustain on these three loans
will not have a material adverse effect on our profitability.
In addition to federal or state regulations, the owner or former owners
of a contaminated site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from the property. See "--Loan and Lease Servicing."
Employees
At June 30, 2000, we employed 911 people on a full-time basis and 43
people on a part-time basis. None of our employees are covered by a collective
bargaining agreement. We consider our employee relations to be good.
Executive Officers Who Are Not Also Directors
The following is a description of the business experience of each
executive officer who is not also a director.
Beverly Santilli, age 41, is First Executive Vice President, a position
she has held since September 1998 and Secretary, a position she has held since
our inception. Mrs. Santilli has held a variety of positions including Executive
Vice President and Vice President. Mrs. Santilli is also the President of
American Business Credit. Mrs. Santilli is responsible for all sales, marketing
and day-to-day operation of American Business Credit. Mrs. Santilli is also
responsible for human resources of ABFS. Prior to joining American Business
Credit and from September 1984 to November 1987, Mrs. Santilli was affiliated
with PSFS initially as an Account Executive and later as a Commercial Lending
Officer with that bank's Private Banking Group. Mrs. Santilli is the wife of
Anthony J. Santilli.
Jeffrey M. Ruben, age 37, is Executive Vice President and General
Counsel, positions he has held since September 1998. He is also Executive Vice
President and General Counsel of some of our subsidiaries, positions he has held
since April 1992. Mr. Ruben is responsible for the loan and the lease
collections departments, the asset allocation unit and the legal department. Mr.
Ruben served as Senior Vice President from April 1992 to September 1998. From
June 1990 until he joined us in April 1992, Mr. Ruben was an attorney with the
law firm of Klehr, Harrison, Harvey, Branzburg & Ellers in Philadelphia,
Pennsylvania. From December 1987 until June 1990, Mr. Ruben was employed as a
credit analyst with the CIT Group Equipment Financing, Inc. Mr. Ruben is a
member of the Pennsylvania and New Jersey Bar Associations.
32
Mr. Ruben holds both a New Jersey Mortgage Banker License and a New Jersey
Secondary Mortgage Banker License.
Albert W. Mandia, age 53, is our Executive Vice President and Chief
Financial Officer of ABFS, positions he has held since June 1998 and October
1998, respectively. Mr. Mandia is responsible for all financial, information
systems and investor relations functions. From 1974 to 1998, Mr. Mandia was
associated with CoreStates Financial Corp. where he last held the position of
Chief Financial Officer from February 1997 to April 1998.
Milt Riseman, age 63, is Chairman of the Consumer Mortgage Group, a
position he has held since June 1999. Mr. Riseman is responsible for the sales,
marketing and day-to-day operation of Upland Mortgage, including the Upland
Mortgage retail operation at the Bala Cynwyd, Pennsylvania headquarters, and the
Upland branch operation, which includes 12 offices throughout the United States.
He is also responsible for the consumer mortgage web site,
www.UplandMortgage.com. Mr. Riseman was President of Advanta Mortgage from
February 1994 until 1999. He joined Advanta in 1992 as Senior Vice President,
Administration. From 1986 until 1992, Mr. Riseman was President of Citicorp
Acceptance Corp. He joined Citicorp in 1965, and in 1978, he moved into general
management positions in the bank's New York region.
Ralph J. Hall, age 51, is Chairman of the Business Alliance Group, a
position he held since joining the Company in May 2000. Mr. Hall is responsible
for leading the Company's New Jersey Mortgage and Processing Service Center
subsidiaries in their business development efforts. He will also lead the
growing business opportunities presented by business-to-business commerce. Mr.
Hall was President and Chief Executive Officer of GreenPoint Mortgage Corp.,
North Carolina and Executive Vice President of GreenPoint Bank, New York, from
July 1995 to April 2000. From 1992 to 1994, Mr. Hall was General Manager and
Chief Operating Officer of GMAC Mortgage Corp., Philadelphia, Pennsylvania.
Before joining GMAC Mortgage, he was President and Chief Executive Officer of
GMAC Capital Corp. in Utah. Mr. Hall has also held positions with Citicorp,
Arthur Anderson & Co., and Shell Oil Company.
Item 2. Properties
Except for real estate acquired in foreclosure in the normal course of
our business, we do not presently hold title to any real estate for operating
purposes. The interests which we presently hold in real estate are in the form
of mortgages against parcels of real estate owned by our borrowers or their
affiliates and real estate acquired through foreclosure.
We presently lease office space at 111 Presidential Boulevard, Bala
Cynwyd, Pennsylvania, just outside the city limits of Philadelphia. We are
currently leasing this office space under lease with an annual rental cost of
approximately $2.2 million. The current lease term expires on July 31, 2003. We
also lease the Roseland, New Jersey office which functions as the headquarters
for New Jersey Mortgage and its subsidiary. The Roseland office lease term
expires in July 2003 and contains a renewal option for an additional term of
five years. The Roseland office facility has a current annual rental cost of
approximately $766,000. In addition, we lease branch offices on a short term
basis in various cities throughout the United States. We do not believe that the
leases for the branch offices are material to our operations.
33
Item 3. Legal Proceedings
From time to time, we are involved as plaintiff or defendant in various
other legal proceedings arising in the normal course of our business. While we
cannot predict the ultimate outcome of these various legal proceedings, it is
management's opinion that the resolution of these legal actions should not have
a material effect on our financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 2000.
34
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Our common stock is currently traded on the NASDAQ National Market
System under the symbol "ABFI." Our common stock began trading on the NASDAQ
National Market System on February 14, 1997. Prior to February 14, 1997, our
common stock had been traded on the Philadelphia Stock Exchange under the symbol
"AFX" since May 13, 1996. Prior to the commencement of trading on the PHLX,
there was no active trading market for our common stock.
The following table sets forth the high and low sales prices of our
common stock for the periods indicated. The stock price information for June 30,
1999 and prior appearing below has been retroactively adjusted to reflect the
effect of a 5% stock dividend declared subsequent to June 30, 1999. On September
15, 2000, the closing price of the common stock on the NASDAQ National Market
System was $10.81.
Quarter Ended High Low
----------------------------------------- ------ ------
June 30, 1998........................... $24.29 $20.95
September 30, 1998...................... 20.71 11.19
December 31, 1998....................... 13.70 5.48
March 31, 1999.......................... 14.29 11.67
June 30, 1999........................... 18.93 10.23
March 31, 2000.......................... 26.00 11.63
June 30, 2000........................... 18.38 9.88
As of June 30, 2000, there were approximately 130 record holders and
approximately 1,400 beneficial holders of our common stock.
During fiscal 2000, we paid dividends of $ 0.30 per share on our common
stock for an aggregate dividend payment of $1.0 million. During fiscal 1999, we
paid $0.165 per share in dividends on our common stock, for an aggregate
dividend payment of $0.5 million. During fiscal 1998, we paid dividends of $0.2
million. The payment of dividends in the future is in the sole discretion of our
Board of Directors and will depend, among other things, upon earnings, capital
requirements and financial condition, as well as other relevant factors.
On August 18, 1999, our Board of Directors declared a 5% stock dividend
paid on September 27, 1999, to stockholders of record as of September 3, 1999.
The stock price information in the table above has been adjusted to reflect this
stock dividend.
As a Delaware corporation, we may not declare and pay dividends on
capital stock if the amount paid exceeds an amount equal to the excess of our
net assets over paid-in-capital or, if there is no excess, our net profits for
the current and/or immediately preceding fiscal year.
On October 27, 1997, we issued 20,240 shares of common stock to Stanley
L. Furst and Joel E. Furst as partial consideration for their 100% interest in
New Jersey Mortgage.
35
This issuance was exempt from registration in accordance with Section
4(2) of the Securities Act of 1933, as amended, because the issuance did not
involve a public offering. Therefore, the shares issued are subject to certain
transfer restrictions.
Item 6. Selected Consolidated Financial Data
You should consider our selected consolidated financial information set
forth below together with the more detailed consolidated financial statements,
the notes to the consolidated financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this document:
Year Ended June 30,
--------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- ------
Statement of Income Data: (Dollars in thousands, except per share data)
Revenues:
Gain on sale of loans and leases.......... $ 90,380 $64,490 $40,778 $19,942 $ 8,721
Interest and fees......................... 19,400 16,553 17,386 5,584 3,245
Interest accretion on interest-only strips 16,616 2,021 538 101 --
Other..................................... 4,250 3,360 633 335 129
-------- ------- ------- ------- -------
Total revenues.............................. 130,646 86,424 59,335 25,962 12,095
Total expenses(a)........................... 120,284 64,573 41,445 16,960 8,974
-------- ------- ------- ------- -------
Operating income before income taxes.. ..... 10,362 21,851 17,890 9,002 3,121
Income taxes................................ 3,938 7,763 6,435 3,062 802
-------- ------- ------- ------- -------
Net income.................................. $ 6,424 $14,088 $11,455 $ 5,940 $ 2,319
======== ======= ======= ======= =======
Per Common Share Data:
Basic earnings per common share(b) ......... $ 1.88 $ 3.83 $ 3.10 $ 2.03 $ 0.96
Diluted earnings per common share(b)........ 1.83 3.72 2.98 1.95 0.96
Cash dividends declared per common share ... 0.30 0.165 0.06 0.06 0.03
- ----------------------
(a) Includes an interest-only strip fair value adjustment of $12.6 million in
the year ended June 30, 2000.
(b) Amounts for the years ended June 30, 1999, 1998, 1997 and 1996 have been
retroactively adjusted to reflect the effect of a 5% stock dividend declared
August 18, 1999 as if the additional shares had been outstanding for each
period presented.
36
June 30,
--------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- ------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents................... $ 69,751 $ 22,395 $ 4,486 $ 5,014 $ 5,345
Loan and lease receivables, net
Available for sale........................ 44,132 33,776 62,382 35,712 18,003
Other..................................... 13,002 6,863 4,096 1,144 534
Interest-only strips........................ 277,872 178,218 95,913 37,507 32,639
Receivable for sold loans and leases........ 51,283 66,086 2,377 960 26
Servicing rights............................ 74,919 43,210 18,472 8,083 5,907
Total assets................................ 592,668 396,301 226,551 103,989 46,894
Subordinated debt........................... 390,676 211,652 115,182 56,486 33,620
Total liabilities........................... 530,553 338,055 183,809 73,077 42,503
Stockholders' equity........................ 62,115 58,246 42,742 30,912 4,392
Year Ended June 30,
--------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- ------
Other Data: (Dollars in thousands, except per share data)
Originations:
Business purpose loans ................... $ 106,187 $ 64,818 $52,335 $38,721 $28,872
Home equity loans ........................ 949,014 634,820 328,089 91,819 36,479
Conventional first mortgage loans......... 42,607 66,519 33,671 -- --
Equipment leases.......................... 19,631 96,289 70,480 8,004 5,967
Loans and Leases Sold:
Securitizations........................... 1,001,702 777,598 384,700 115,000 36,506
Othe